Blog Feed: principal

Join Now

Already a Member? Log In to Your Account

Home

My Account

Blog Profile

Insights

Blog Feed

Articles

User Profile

US market portrait 2012 week 23

Published on 2012-06-03 03:20:15

US large cap market returns. Fine print The data are from Yahoo Almost all of the S&P 500 stocks are used The initial post was “Replacing market indices” The R code is in marketportrait_funs.R Subscribe to the Portfolio Probe blog by Email

Inferno-ish R

Published on 2012-05-31 03:45:22

CambR was nice enough to invite Markus Gesmann and me to speak at their event on Tuesday. My talk was Inferno-ish R. See also The R Inferno. Epilogue Subscribe to the Portfolio Probe blog by Email

Jackknifing portfolio decision returns

Published on 2012-05-28 03:37:26

A look at return variability for portfolio changes. The problem Suppose we make some change to our portfolio. At a later date we can see if that change was good or bad for the portfolio return. Say, for instance, that it helped by 16 basis points. How do we properly account for variability in that … Continue reading →

US market portrait 2012 week 22

Published on 2012-05-27 03:57:17

Correlations and postive-definiteness

Published on 2012-05-22 03:50:48

On the way to another destination, I found some curious behavior with average correlations. The data Daily log returns from almost all of the constituents of the S&P 500 for years 2006 through 2011. The behavior Figure 1 shows the actual mean correlation among stocks for the set of years and the mean correlation with … Continue reading →

CambR and other upcoming events

Published on 2012-05-21 03:45:49

New events CambR (Cambridge UK R user group) 2012 May 29 6:30 PM for 7:00 PM start. Pat Burns “Inferno-ish R” Abstract: While R is wonderful, it is not uniformly wonderful. We highlight a few things generally found to be confusing, and outline the forces that have driven such imperfections. Markus Gesmann “Interactive charts with … Continue reading →

US market portrait 2012 week 21

Published on 2012-05-20 04:31:18

US large cap market returns. There is an additional feature in the plots this week, a brief explanation is in the update to the post “Replacing market indices”. Fine print The data are from Yahoo Almost all of the S&P 500 stocks are used The initial post was “Replacing market indices” The R code is … Continue reading →

Exponential decay models

Published on 2012-05-17 04:45:41

All models are wrong, some models are more wrong than others. The streetlight model Exponential decay models are quite common. But why? One reason a model might be popular is that it contains a reasonable approximation to the mechanism that generates the data. That is seriously unlikely in this case. When it is dark and … Continue reading →

Newsletter sign-up problems

Published on 2012-05-15 05:43:01

There have been some issues with the sign-up process for the Portfolio Probe newsletter and the Portfolio Probe user’s list. The issues may or may not be in the past tense. The way the process is supposed to work is: You sign up for one or both lists You get a message from us saying … Continue reading →

Random portfolios: 6 steps to a better fund management industry

Published on 2012-05-14 04:10:12

Only puny secrets need protection. Big discoveries are protected by public incredulity. – Marshall McLuhan Random portfolios have the power to improve the practice of asset management in several ways. Here are six. 1) Measure active managers There is no convincing evidence that more than a handful of funds have consistently outperformed. This should tell … Continue reading →

Thalesians and other upcoming events

Published on 2012-05-13 10:17:56

Real Soon Now Thalesians (London) 2012 May 16 Matthew Dixon “A Bayesian Approach to Discovering Private Companies for Private Equity Investments”. Details of the event. Thalesians (New York) 2012 May 17 Attilio Meucci “Liquidity-, Funding- and Market-Risk” Details of the event. Other new events Thalesians (San Francisco) 2012 May 30 Jeremy Evnine “Accidental Quant”. I … Continue reading →

US market portrait 2012 week 20

Published on 2012-05-12 13:22:48

Asset correlations with minimum variance portfolios

Published on 2012-05-09 04:52:18

The minimum variance portfolios have slightly reduced correlations to assets in weight-constrained portfolios. Previously “Portfolio diversity” introduced the topic of asset-portfolio correlations. It also generated four sets of long-only random portfolios as of the start of 2011 using constituents of the S&P 500: exactly 20 names, weights between 1% and 10% exactly 200 names, weights … Continue reading →

Diverse US portfolios did well in 2011

Published on 2012-05-08 03:36:55

Constraining the maximum asset-portfolio correlation gave bigger returns and smaller volatility. Previously “Portfolio diversity” introduced the topic of asset-portfolio correlations. It also generated four sets of long-only random portfolios as of the start of 2011 using constituents of the S&P 500: exactly 20 names, weights between 1% and 10% exactly 20 names, maximum asset-portfolio correlation … Continue reading →

Portfolio diversity

Published on 2012-05-07 03:47:27

How many baskets are your eggs in? Meucci diversity Attilio Meucci directly addresses the adage: Don’t put all your eggs in one basket. His idea is to think of your portfolio as a set of subportfolios that are each uncorrelated with the rest. If your portfolio can be configured to have a lot of roughly … Continue reading →

US market portrait 2012 week 19

Published on 2012-05-06 03:32:58

US large cap market returns.

Motivating retirement savings

Published on 2012-05-05 02:20:12

You can win money by saying how to get people to treat themselves better. InnoCentive has a challenge: How do we best get people to understand how important it is to plan for, and take specific action steps today, to create a steady and reliable stream of income for their retirement years? What would be … Continue reading →

Cross-sectional skewness and kurtosis: stocks and portfolios

Published on 2012-04-30 04:22:37

Not quite expected behavior of skewness and kurtosis. The question In each time period the returns of a universe of stocks will have some distribution — distributions as displayed in “Replacing market indices” and Figure 1. Figure 1: A cross-sectional distribution of simple returns of stocks. In particular they will have values for skewness and … Continue reading →

US market portrait 2012 week 18

Published on 2012-04-29 04:34:30

A variance campaign that failed

Published on 2012-04-23 03:51:09

they ought at least be allowed to state why they didn’t do anything and also to explain the process by which they didn’t do anything. First blush One of the nice things about R is that new statistical techniques fall into it. One such is the glasso (related to the statistical lasso) which converts degenerate … Continue reading →

US market portrait 2012 week 17

Published on 2012-04-22 06:02:53

Low volatility investing and benchmarks

Published on 2012-04-21 04:09:12

The focus on tracking error rules out a low volatility strategy. Simply put, most money managers are focused on outperforming their benchmarks without adding risk. And because risk is measured on a relative basis, a portfolio that moves up and down less than its benchmark is perceived as more risky on a relative basis because … Continue reading →

Information flows like water

Published on 2012-04-16 03:44:31

Guiding a ship, it takes more than your skill Spark David Rowe’s Risk column this month is about data leverage. The idea is that you are leveraging your data if you are using it to answer questions that are too demanding of information. The piece reminded me of a talk that Dave gave a few … Continue reading →

US market portrait 2012 week 16

Published on 2012-04-15 06:03:27

Three things factor models do

Published on 2012-04-09 03:14:17

Factor models are heavily used in finance to create variance matrices. Here’s why. Factor models: Provide non-degenerate estimates Save space Quantify sources of risk Non-degenerate estimates First off, what does this mean? The technical term is that you want your estimate of the variance matrix to be positive definite. In practical terms what that means … Continue reading →

US market portrait 2012 week 10

Published on 2012-04-08 05:48:50

Betas of the low vol cohorts

Published on 2012-04-04 02:54:06

How did the constraints affect portfolio betas, and how did the betas change over time? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios — the so-called low vol cohorts — as of 2007 and showed their performance up to about a month ago. “Rebalancing the low vol cohorts” looked at … Continue reading →

Replacing market indices

Published on 2012-04-02 03:25:23

If equity markets suddenly sprang into existence now, would we create market indices? I’m doubtful. Why an index? The Dow Jones Industrial Average was born in 1896. This was when computers were humans with adding machines (but they did do parallel processing). At that point boiling “the market” down to a single number had value. … Continue reading →

Maximum weight of the low vol cohorts

Published on 2012-03-29 03:01:34

Maximum weight was constrained to 4% at the start of 2007, how does that grow when unhindered? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios as of 2007 and showed their performance up to about a month ago. “Rebalancing the low vol cohorts” looked at how much turnover was required … Continue reading →

Rebalancing the low vol cohorts

Published on 2012-03-28 03:28:24

How much turnover is required to get portfolios back to their constraints? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios as of 2007 and showed their performance up to about a month ago. This post explores how much turnover it takes to get the portfolios to obey their constraints at … Continue reading →

Beta is not volatility

Published on 2012-03-26 03:54:43

The missing link between beta and volatility is correlation. Previously “4 and a half myths about beta in finance” attempted to dislodge several myths about beta, including that beta is about volatility. “Low (and high) volatility strategy effects” showed a plot of beta versus volatility for stocks in the S&P 500 for estimates from 2006. … Continue reading →

Low (and high) volatility strategy effects

Published on 2012-03-23 04:16:45

Does minimum variance act differently from low volatility? Do either of them act like low beta? What about high volatility versus high beta? Inspiration Falkenblog had a post investigating differences in results when using different strategies for low volatility investing. Here we look not at a single portfolio of a given strategy over time, but … Continue reading →

Review of “The Origin of Financial Crises” by George Cooper

Published on 2012-03-19 04:27:45

The subtitle is “Central banks, credit bubbles and the efficient market fallacy”. Executive summary This is much too important of a book to remain as obscure as it is. Besides, it is quite a fun read. It talks about two subjects: Why markets for goods and services tend toward equilibrium but financial markets do not. … Continue reading →

The Battle of Fundamental Index

Published on 2012-03-16 04:11:24

The pro and con of fundamental indexing. Last Tuesday the London Quant Group sponsored a boxing match between forces for and against fundamental indexing. Adam Olive was in the pro corner. Ed Fishwick was in the con corner. Round 1: FI comes out swinging Fundamental indexing is an alternative to market capitalization indexing. The optimal … Continue reading →

The quality of variance matrix estimation

Published on 2012-03-12 05:03:57

A bit of testing of the estimation of the variance matrix for S&P 500 stocks in 2011. Previously There was a plot in “Realized efficient frontiers” showing the realized volatility in 2011 versus a prediction of volatility at the beginning of the year for a set of random portfolios. A reader commented to me privately … Continue reading →

The shadows and light of models

Published on 2012-03-05 03:09:36

How wide is the darkness? Uses of models The main way models are used is to: shine light on the “truth” We create and use a model to learn how some part of the world works. But there is a another use of models that is unfortunately rare — a use that should be common … Continue reading →

A minimum variance portfolio in 2011

Published on 2012-02-29 03:38:13

2011 was a good vintage for minimum variance, at least among stocks in the S&P 500. Previously The post “Realized efficient frontiers” included, of course, a minimum variance portfolio. That portfolio seemed interesting enough to explore some more. “What does ‘passive investing’ really mean” suggests that minimum variance should be considered a form of passive … Continue reading →

Realized efficient frontiers

Published on 2012-02-27 03:20:31

A look at the distortion from predicted to realized. The idea The efficient frontier is a mainstay of academic quant. I’ve made fun of it before. This post explores the efficient frontier in a slightly less snarky fashion. Data The universe is 474 stocks in the S&P 500. The predictions are made using data from … Continue reading →

What does ‘passive investing’ really mean?

Published on 2012-02-20 03:49:22

We know the words but what do they mean? Some definitions Here are some definitions of “passive investment management”. Investopedia says: A style of management associated with mutual and exchange-traded funds (ETF) where a fund’s portfolio mirrors a market index. Wikipedia says: Passive management (also called passive investing) is a financial strategy in which an investor (or … Continue reading →

Blog aggregators

Published on 2012-02-17 05:56:46

The Portfolio Probe blog is caught by two blog aggregators. Finance MoneyScience has an aggregation of financial blogs. It now catches over 50 blogs. R R Bloggers captures the Portfolio Probe posts that are in the R Language category. It gets posts from over 300 blogs that talk about R. Figure 1 shows a plot … Continue reading →

The BurStFin R package

Published on 2012-02-16 04:00:39

Version 1.01 of BurStFin is now on CRAN. It is written entirely in R, and meant to be compatible with S+. Functionality The package is aimed at quantitative finance, but the variance estimation functions could be of use in other applications as well. Also of general interest is threeDarr which creates a three-dimensional array out … Continue reading →

A slice of S&P 500 kurtosis history

Published on 2012-02-13 04:28:19

How fat tailed are returns, and how does it change over time? Previously The sister post of this one is “A slice of S&P 500 skewness history”. Orientation The word “kurtosis” is a bit weird. The original idea was of peakedness — how peaked is the distribution at the center. That’s what we can see, … Continue reading →

The US market will absolutely positively definitely go up in 2012

Published on 2012-02-06 03:37:58

The Super Bowl tells us so. The Super Bowl Indicator The championship of American football decides the direction of the US stock market for the year. If a “National” team wins, the market goes up; if an “American” team wins, the market goes down. Yesterday the Giants, a National team, beat the Patriots. The birth … Continue reading →

Review of “Models. Behaving. Badly.” by Emanuel Derman

Published on 2012-01-30 04:24:53

Why confusing illusion with reality can lead to disaster, on Wall Street and in life. Note that the cover is more clever than you might at first notice. Ceci n’est pas une pipe. You might also have a guess at the reason for the punctuation in the title. Executive summary Non-quants should embrace models more, … Continue reading →

Positional stocks

Published on 2012-01-26 03:25:29

Conspicuous consumption — buying what others can’t afford — is a disequilibriating force. Prices get raised and supply is limited. The goods that are conspicuously consumed are positional goods. A similar phenomenon occurs in the stock market. AAPL currently seems to fit the mold. Fashion changes. I don’t much believe in predictions, but I predict … Continue reading →

London Quant Group and other upcoming events

Published on 2012-01-24 04:20:31

London Quant Group Monday 2012 January 30 starting at 6.30pm, to be held at the offices of BlackRock, 12 Throgmorton Avenue, London. Jason MacQueen speaking on “The Structure of Equity Risk Models”. Abstract:There are a number of different ways to build equity risk models, and some are demonstrably better than others. This talk will first … Continue reading →

The distribution of financial returns made simple

Published on 2012-01-23 03:36:34

Why returns have a stable distribution As “A tale of two returns” points out, the log return of a long period of time is the sum of the log returns of the shorter periods within the long period. The log return over a year is the sum of the daily log returns in the year. … Continue reading →

How to search the R-sig-finance archives

Published on 2012-01-19 03:08:28

A not unusual part of a response on the R-sig-finance mailing list is: “Search the list archives.” In principle that makes sense. In practice it might not be clear what to do. Now it should be. The list The R-sig-finance mailing list deals with the intersection of questions about the R language and finance. It … Continue reading →

Email subscription now available

Published on 2011-07-05 03:37:19

The blog Email It is now possible to subscribe to the Portfolio Probe blog via email. Just click on: Subscribe to the Portfolio Probe blog by Email (The captcha is often quite challenging, you’ll probably want to refresh a few times until you

Benchmarking low-volatilty strategies

Published on 2011-07-04 03:50:41

Low volatility investing and performance measurement — my favorite topic scheme — how could I resist? The paper The paper is “Benchmarking Low-Volatility Strategies” by David Blitz and Pim van Vliet. The problem They claim tha

Winsorization

Published on 2011-06-30 04:54:34

Winsorization replaces extreme data values with less extreme values. But why Extreme values sometimes have a big effect on statistical operations. That effect is not necessarily a good effect. One approach to the problem is to change the statisti

Review of “Adapt” by Tim Harford

Published on 2011-06-26 20:01:49

The subtitle is “Why success always starts with failure”. Executive summary Brilliant. Funny. Enlightening. Complexity We live in a complex world. Exhibit number 1 (page 1) is the Toaster Project. Our brains are too small to know what

Talking The R Journal latest release

Published on 2011-06-24 05:55:35

Volume 3/1 of The R Journal has been released. It of course has articles about using R. In addition it has a feature that I highly support. In preparation for the UseR! Conference 2011 August 16-18 in Coventry there are two Help Desk articles on

Highlights of the London Quant Group Technology Day

Published on 2011-06-22 14:16:06

A summary of the high points of the day. Factor models and optimization Three of the talks formed a theme: factor models of variance — especially as applied to portfolio optimization. The basic problem is that variance matrices are created with

Performance ratios, bootstrapping and infinite variances

Published on 2011-06-18 20:57:41

If returns had infinite variance, would there be a problem bootstrapping information ratios? Background There is a discussion on the Quant Finance group of LinkedIn with the title: “How do you measure the confidence intervals of performance rat

Bubble anatomy

Published on 2011-06-17 03:53:23

Here is a schematic of a financial bubble. This is taken from a post by The Reformed Broker. Questions The picture feels right to me, but … Is there any data to support it? What process could fit a model like this without assuming the answer? R

Market arrows

Published on 2011-06-16 03:07:18

Graphs like Figure 1 are reasonably common. But they are not reasonable. Figure 1: A (log) price series with an explicit guide line. Some have the prices on a logarithmic scale, which is an improvement on the raw prices. The problem with this sort

Premortem stress tests

Published on 2011-06-13 01:55:10

To look in the corners we want to avoid. David Rowe’s latest Risk column, “Stress testing culture”, concerns the difficulty of developing good stress scenarios. One of his particular concerns is that it is against our nature to co

Thank you government

Published on 2011-06-07 02:43:21

You probably thought the title was ironic. Why should that be? Mutual benefit Falkenblog has a post that includes: When the barista says ‘thank you’ for buying coffee, and I say ‘thank you’ back, we have a double thank you m

Review of “Boombustology” by Vikram Mansharamani

Published on 2011-06-05 20:20:42

How can we spot bubbles before they burst? Executive Summary I had high hopes for this book. The first 5 chapters lived up to my expectations. The remaining chapters, though interesting in spots, are a bit vapid. However, those first 5 chapters

Selections from the R/Finance conference

Published on 2011-06-02 04:14:33

The R/Finance conference happened in Chicago at the end of April. If, like me, you weren’t there, you can still benefit from it because slides from many of the talks are now online. Here is a quick synopsis (in chronological order) of some of

Attilio Meucci starts praying

Published on 2011-05-31 03:13:22

Attilio Meucci has written “The Prayer” which gives a ten-step process of quantitative analysis of the profit and loss stream. The paper is nicely laid out. Each step includes at least one “key concept” box. These give a c

A data search engine

Published on 2011-05-26 10:47:18

Zanran is a new search engine that helps you find data. It indexes items that have tables or figures that seem to display data. It looks to be significantly more useful than a general search engine when it’s data you want. Search results are

Specific differences between Ledoit-Wolf and factor models

Published on 2011-05-22 20:48:10

What can we learn about the difference in structure between a Ledoit-Wolf variance matrix and a corresponding factor model variance? Previously We’ve generated a set of random portfolios with constraints on the risk fractions of a Ledoit-Wolf v

Recap of London Quant Group Spring Seminar

Published on 2011-05-19 02:40:50

The London Quant Group Spring Seminar took place this Monday and Tuesday 2011 May 16-17. There were 9 talks — I give a brief (and biased) summary of each. Dan di Bartolomeo Dan talked about the information ratios that active managers have. He

What is a good benchmark?

Published on 2011-05-15 05:58:41

One suggestion is that benchmarks should be: transparent & unambiguous frame-able & customize-able appropriate with full coverage investable The source of this suggestion is Setting the Benchmark: Spotlight on Private Equity. This was discuss

Risk and Mayan hieroglyphics

Published on 2011-05-09 03:13:42

How does modern risk management relate to Mayan hieroglyphics? If you want to guess, here are some hints: fire language Connecticut The Mayan civilization prospered in Central America at roughly the same time as the Roman Empire. They had architect

Again with Ledoit-Wolf and factor models

Published on 2011-05-04 12:16:41

We come closer to a definitive answer on the relative merit of Ledoit-Wolf shrinkage versus a statistical factor model for variance matrices. Previously This post builds on the post entitled: A test of Ledoit-Wolf versus a factor model That post depe

The R Inferno revised

Published on 2011-05-01 20:31:49

Hell is new and improved. The R Inferno has been revised. If you don’t know of it, it is a short explanation of a few trouble spots when using the R language. Somehow the short explanation grew to approach book-length. It can be found at th

A test of Ledoit-Wolf versus a factor model

Published on 2011-04-27 20:33:07

Statistical factor models and Ledoit-Wolf shrinkage are competing methods for estimating variance matrices of returns. So which is better? This adds a data point for answering that question. Previously There are past blog posts on: the idea of va

Review of “Smart Swarm” by Peter Miller

Published on 2011-04-25 03:38:37

Smart Swarm is a book about decision-making. Fund management is all about decision-making. Hence this book is about fund management. Indeed financial examples crop up several times. Executive summary Smart Swarm: Using animal behavior to change

Risk fraction constraints and volatility

Published on 2011-04-21 04:14:12

What is the effect on predicted and realized volatility of substituting risk fraction constraints for weight constraints? Previously This post depends on two previous blog posts: “Unproxying weight constraints” “Weight compared to r

Weight compared to risk fraction

Published on 2011-04-18 04:34:43

How well do asset weight constraints constrain risk? The setup In “Unproxying weight constraints” I claimed that many constraints on asset weights are really a proxy for constraining risk. That is not a problem if weights are a good proxy

A bit of analysis of the Dow golden cross

Published on 2011-04-16 14:02:06

I’d never heard of the golden cross before a few minutes ago. But The Reformed Broker talked about it. He lists some data that just ached to be thrown into a statistical bootstrap in R. So here it is. Joshua informs us that a golden cross is

Scoping out the financial universe

Published on 2011-04-14 04:09:18

Four hundred years ago today Galileo Galilei brought forth a new instrument. On 1611 April 14 Galileo did a demo of his telescope in Rome. That bit of glass changed our view of the universe. He saw four moons orbiting Jupiter. This was good evide

Unproxying weight constraints

Published on 2011-04-13 03:30:30

It is common practice to have portfolio constraints like: wi ≤ 0.05 That is, the weight of each asset can be no more than 5%. Proxy for risk We think that is what we want to do because we are so used to doing it. But why should we care about

Market beliefs

Published on 2011-04-03 20:27:48

Friday was a day to fool others. Every day is a day to fool ourselves. Primed to know The video gives a great example of how knowing what to expect makes the expectation come true. The entire 13.5 minute talk is wonderful, but you can skip to abo

The devil of overfitting

Published on 2011-03-27 20:00:24

Overfitting is a problem when trying to predict financial returns. Perhaps you’ve heard that before. Some simple examples should clarify what overfitting is — and may surprise you. Polynomials Let’s suppose that the true expecte

The book of doom

Published on 2011-03-21 04:21:38

Markets can be disrupted in numerous ways. We should prepare as best we can. Gloom Here are some things that will happen some day: An epidemic threatens millions or billions of people. A solar storm cuts electricity to wide areas for weeks or month

Which way is the future?

Published on 2011-03-14 04:27:18

In the Aymara language the past is in front and the future is behind. It is rare for languages (at least existing ones) to have the metaphor turned this way. But it makes sense to me — maybe it’s the quant in me. We can see the past, an

Factor models of variance in finance

Published on 2011-03-07 03:13:24

In “What the hell is a variance matrix?” I talked about the basics of variance matrices and highlighted challenges for estimating them in finance. Here we look more deeply at the most popular estimation technique. Models for variance ma

Upcoming Events

Published on 2011-03-02 14:18:38

2011 March 08, 8:00 AM, London EDHEC Risk Institute presents: Raman Uppal How to (or how not to) manage money New approaches for portfolio construction. Admission is free, but registration (soon) is required. More details in the brochure (pdf) 2011 M

An investment lottery

Published on 2011-02-28 03:35:00

Can fund managers capture money that is now gambled away? Investing versus gambling A clean, though imperfect, distinction between investing and gambling is: if the expected return is positive, it is investing if the expected return is negative, it i

Inflexible regime, inflexible prices

Published on 2011-02-25 03:57:10

There is a deep connection between political mechanisms and economic mechanisms, at least according to Ajay Shah. Price flexibility Ajay Shah has a post called Jittery regimes fix prices. It is well worth reading the whole piece (which isn’t ve

Thalesians: events and videos

Published on 2011-02-20 10:23:21

The Thalesians is a group that has been going for a few years in London, and is just about to have its first event in New York. It holds events on various topics that are generally not far from quantitative finance. Events The first New York talk w

Who are the innocent bystanders?

Published on 2011-02-17 13:20:36

High volatility stocks are, in general, nonsensical. Who’s to blame? The high vol gamble Theory says that investors demand higher returns for higher volatility assets. Reality says that the most volatile stocks have the lowest expected retu

A tangle of luck and skill

Published on 2011-02-14 12:40:57

Some concrete steps for discerning skill from luck. The Harvard Business Review published a guest blog post by Michael Mauboussin called Untangling Skill and Luck. That post is really a brief introduction to a longer piece which is also called Untang

Quantitative finance now on Stack Exchange

Published on 2011-02-10 13:02:12

The site is http://quant.stackexchange.com/ A new area has emerged in Stack Exchange for Quantitative Finance (in trying to spell that I now know why it is usually just “quant”). It has been in private beta for a few weeks and has becom

4 and a half myths about beta in finance

Published on 2011-02-08 02:12:05

Much of what has been said and thought about beta in finance is untrue. Myth 1: beta is about volatility This myth is pervasive. Beta is associated with the stock’s volatility but there is more involved. Beta is the ratio of the volatility of

Dicing with the market

Published on 2011-02-07 04:21:03

How to visualize luck when looking for skill. Quantitative Finance just published the paper Dicing with the market: randomized procedures for evaluation of mutual funds by Francesco Lisi. Here is the working paper version. This paper explains one w

The Super Bowl Indicator

Published on 2011-02-04 05:24:34

The Super Bowl will take place on Sunday. This is the final game for American Football (if you have to ask, then: “No, not real football”). Not only is it a highlight in sports, it is also a financial highlight as it determines the fate o

The mean reversion of Groundhog Day

Published on 2011-02-01 13:12:01

February 2nd is Groundhog Day. If Punxsutawney Phil sees his shadow, then he goes back into his burrow and hibernates for six more weeks. Otherwise he predicts an early spring. It is really a mean reversion idea — current good weather means

Beware Mr Market

Published on 2011-01-31 04:07:41

Thinking of the market as having a personality can be fun and educational. But it has a dark side as well. Benjamin Graham The idea of Mr Market was created by Benjamin Graham as a way of conveying the wisdom of fundamental analysis. Graham’s

Financial instability

Published on 2011-01-28 04:33:08

Instability in the economy seems to be the zeitgeist of the week. Counter-intuitives Science Daily has a story on a mathematical model of extinction. Apparently a key finding is that the most effective interventions in the model when a species declin

A field guide to market participants

Published on 2011-01-26 04:04:01

Fundamental Hawk (perusii balancesheetus) Very discriminating in diet. Often seen scratching in the undergrowth. Subsists on irrationality, short-lived variety only. Macro Harrier (exsanguinus economicus) Flies very high. Reports of bombardier be

Review of “R Graphs Cookbook” by Hrishi Mittal

Published on 2011-01-24 13:17:33

Executive summary: Extremely useful for new users, informative to even quite seasoned users. Refereeing Once upon a time a publisher asked if I would referee a book (unspecified) about R. In an instance that can only be described as psychotic I sai

Paying interest and the number e

Published on 2011-01-24 03:57:17

Suppose I borrow a dollar from you and I’ll pay you 100% interest at the end of the year. How much money will you have then? $1 * (1 + 1) = $2 What happens if instead the interest is calculated as 50% twice in the year? $1 * (1.5 * 1.5) = $

In the blogosphere this week: sunshine and Vegas

Published on 2011-01-20 13:44:32

Gambling Falkenblog has a post called: Why Do People Gamble? This includes the often-stated “problem” that the same people both: pay for insurance pay to gamble Maybe I’m being thick, but I don’t see any problem. I see both

Normal market accidents

Published on 2011-01-17 04:30:41

We think of accidents as abnormal events, but there is “normal accident” theory. We don’t think of accidents happening in markets, but they do. That’s why it’s called a market crash. For normal accidents to come into

Elsewhere in the blogosphere this week

Published on 2011-01-14 04:38:29

Markets Sex and statistics Marginal Revolution had the post Sex and Statistics or Heteroscedasticity is Hot which reports on the OkTrends post The Mathematics of Beauty. The summary is that conditional on their average beauty rating, the women with m

The number 1 novice quant mistake

Published on 2011-01-12 05:08:30

It is ever so easy to make blunders when doing quantitative finance. Very popular with novices is to analyze prices rather than returns. Regression on the prices When you want returns, you should understand log returns versus simple returns. Here w

Boris The Banker explains efficient markets

Published on 2011-01-10 04:02:16

Amy Anyone: What is EMH? Boris The Banker: That’s the Efficient Market Hypothesis, or sometimes the Efficient Markets Hypothesis. Amy: What’s that? Boris: It says that all available and relevant information has been taken into account in

Some market predictions

Published on 2011-01-06 10:41:13

We look at a few forecasts for the year 2011 that we’ve run across, and compare them with the prediction distributions presented in Revised market prediction distributions. FTSE 100 There is a “range forecast” on an Interactive Inve

Revised market prediction distributions

Published on 2011-01-04 11:35:34

This provides revised plots of the prediction distributions published yesterday. The previous plots of prediction distributions should be ignored — they are not doing as advertised. We show the prediction distribution of levels of several equ

Creating prediction distributions

Published on 2011-01-04 03:54:08

Here we give details and code for the prediction distributions exhibited in yesterday’s blog post “Tis the season to predict”. [Revision: There was a problem with the plots published in that post. For corrected plots and an explan

Tis the season to predict

Published on 2011-01-03 04:34:18

I predict there will be a lot of predictions of markets for the coming year. Here is a calibration of such predictions. We show the prediction distribution of levels of several equity indices (plus oil price) at the end of 2011 assuming nothing hap

Online Marketing

Blog Feed: principal

Home > Blog Directory > Newest Posts > Blog Feed: principal